Investors Met With Slowing Returns on Capital At AMETEK (NYSE:AME)

To find a multi-bagger stock, what are the underlying trends we should look for in a business? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. If you see this, it typically means it's a company with a great business model and plenty of profitable reinvestment opportunities. So, when we ran our eye over AMETEK's (NYSE:AME) trend of ROCE, we liked what we saw.

Understanding Return On Capital Employed (ROCE)

For those that aren't sure what ROCE is, it measures the amount of pre-tax profits a company can generate from the capital employed in its business. Analysts use this formula to calculate it for AMETEK:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.14 = US$1.5b ÷ (US$12b - US$1.6b) (Based on the trailing twelve months to December 2022).

Therefore, AMETEK has an ROCE of 14%. In absolute terms, that's a pretty normal return, and it's somewhat close to the Electrical industry average of 12%.

Check out our latest analysis for AMETEK

Above you can see how the current ROCE for AMETEK compares to its prior returns on capital, but there's only so much you can tell from the past. If you'd like, you can check out the forecasts from the analysts covering AMETEK here for free.

SWOT Analysis for AMETEK

So How Is AMETEK's ROCE Trending?

While the current returns on capital are decent, they haven't changed much. The company has consistently earned 14% for the last five years, and the capital employed within the business has risen 63% in that time. 14% is a pretty standard return, and it provides some comfort knowing that AMETEK has consistently earned this amount. Over long periods of time, returns like these might not be too exciting, but with consistency they can pay off in terms of share price returns.

The Key Takeaway

The main thing to remember is that AMETEK has proven its ability to continually reinvest at respectable rates of return. And long term investors would be thrilled with the 103% return they've received over the last five years. So while investors seem to be recognizing these promising trends, we still believe the stock deserves further research.

AMETEK does have some risks though, and we've spotted 1 warning sign for AMETEK that you might be interested in.

While AMETEK isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.